Session 119PD, Pricing Risk: From a Solvency Perspective. Moderator/Presenter: Rhonda K. Ahrens, FSA, MAAA

Transcription

1 Session 119PD, Pricing Risk: From a Solvency Perspective Moderator/Presenter: Rhonda K. Ahrens, FSA, MAAA Presenters: Rhonda K. Ahrens, FSA, MAAA Keith A. Epperson, ASA, MAAA Shumei R. Kuo, FSA, MAAA Brad A. Ober, FSA, MAAA Lisa M. Parker, ASA, MAAA, PIR SOA Antitrust Disclaimer SOA Presentation Disclaimer

2 2018 SOA Health Meeting Session 119, Pricing Risk: From a Solvency Perspective June 27, 2018 BRAD OBER, FSA, MAAA KEITH A EPPERSON, ASA, MAAA LISA PARKER, ASA, MAAA SHUMEI KUO, FSA, MAAA MODERATOR: RHONDA AHRENS, FSA, MAAA

3 SOCIETY OF ACTUARIES Antitrust Compliance Guidelines Active participation in the Society of Actuaries is an important aspect of membership. While the positive contributions of professional societies and associations are well-recognized and encouraged, association activities are vulnerable to close antitrust scrutiny. By their very nature, associations bring together industry competitors and other market participants. The United States antitrust laws aim to protect consumers by preserving the free economy and prohibiting anti-competitive business practices; they promote competition. There are both state and federal antitrust laws, although state antitrust laws closely follow federal law. The Sherman Act, is the primary U.S. antitrust law pertaining to association activities. The Sherman Act prohibits every contract, combination or conspiracy that places an unreasonable restraint on trade. There are, however, some activities that are illegal under all circumstances, such as price fixing, market allocation and collusive bidding. There is no safe harbor under the antitrust law for professional association activities. Therefore, association meeting participants should refrain from discussing any activity that could potentially be construed as having an anti-competitive effect. Discussions relating to product or service pricing, market allocations, membership restrictions, product standardization or other conditions on trade could arguably be perceived as a restraint on trade and may expose the SOA and its members to antitrust enforcement procedures. While participating in all SOA in person meetings, webinars, teleconferences or side discussions, you should avoid discussing competitively sensitive information with competitors and follow these guidelines: Do not discuss prices for services or products or anything else that might affect prices Do not discuss what you or other entities plan to do in a particular geographic or product markets or with particular customers. Do not speak on behalf of the SOA or any of its committees unless specifically authorized to do so. Do leave a meeting where any anticompetitive pricing or market allocation discussion occurs. Do alert SOA staff and/or legal counsel to any concerning discussions Do consult with legal counsel before raising any matter or making a statement that may involve competitively sensitive information. Adherence to these guidelines involves not only avoidance of antitrust violations, but avoidance of behavior which might be so construed. These guidelines only provide an overview of prohibited activities. SOA legal counsel reviews meeting agenda and materials as deemed appropriate and any discussion that departs from the formal agenda should be scrutinized carefully. Antitrust compliance is everyone s responsibility; however, please seek legal counsel if you have any questions or concerns. 2

4 Presentation Disclaimer Presentations are intended for educational purposes only and do not replace independent professional judgment. Statements of fact and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of the Society of Actuaries, its cosponsors or its committees. The Society of Actuaries does not endorse or approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented. Attendees should note that the sessions are audio-recorded and may be published in various media, including print, audio and video formats without further notice. 3

5 Introduction and Speakers: Pricing From a Solvency Perspective Panel Presentation with Live Polling Overview of Solvency and Basic Pricing Considerations Brad Ober, FSA, MAAA Corporate Decision Making While Pricing for Solvency Keith A Epperson, ASA, MAAA Regulatory Evaluation of Solvency With Respect To Pricing Risk Lisa Parker, ASA, MAAA and Shumei Kuo, FSA, MAAA Moderator: Rhonda Ahrens, FSA, MAAA 4

6 Overview of Solvency And Basic Pricing Considerations Brad Ober, FSA, MAAA 5

7 Insolvent = Unable to pay debts. Q: When is an insurer considered insolvent? A: Whenever the insurance department* says it is (and the courts agree). *usually, that of the state of domicile but could be any state in which a company is licensed 6

8 States don t want insurer insolvencies: Harmful to policyholders Huge burden on state insurance departments Hurts consumer confidence bad for economy Insurance market instability Pride perception that they may be partially to blame (whether fair or not) 7

9 What might make a state think an insurer may be in danger of insolvency? Statutory statement review Market conduct finding - e.g. company not fulfilling contractual obligations Rate filings Consumer complaints Rating agency reports SEC filings 8

10 Statutory Statement Red Flags: Inadequate capital levels Inappropriately valued assets/liabilities Poor earnings Financial ratios outside of acceptable range 9

11 Risk Based Capital: Level of capital for each major risk Less than the sum of each part covariance adjustment Major Risks: 1. Asset 2. Underwriting 3. Other 10

12 Insurer total capital below 35% of RBC Formula value: This is called Mandatory Control Level Risk Based Capital and the state must place insurer under regulatory supervision if this happens. Not technically Insolvent but close enough! 11

13 Q: How can Pricing impact an insurer s total capital to the extent that it drops below Mandatory Control Level Risk Based Capital? (not necessarily pricing errors ) 12

14 Pricing Risks: Product priced right initially then rapid changes in market (new trends, services, fads?, etc.). Underwriting Risk. Underpriced product (obviously): feedback loop required capital goes up, total capital goes down closer and closer to MCL RBC. Underwriting Risk. Overpriced product: less direct impact more impact on Other Risk (rather than Underwriting Risk). Feedback loop. Lack of Product Diversity amplifies pricing risk 13

15 Other Pricing Risks? ACA MLR requirements actuaries tend to be less conservative (riskier) when pricing? Rate Increases harder to get take longer. Commodity Products extreme competitive pressure on rates. Anti-Health Insurance sentiment growing? National Health Care? Desire to see insurers fail? 14

16 Corporate Decision Making While Pricing for Solvency Keith Epperson, ASA, MAAA 15

17 Pricing Considerations from a Start-up/Growth Company Perspective Approach Capital as a barrier to entry (Investor capital to enter the ACA and MA space) Business plan, ProForma and detailed Surplus Sufficiency Report in order to obtain A&H licensure Applying market research and pricing rigor Prior carrier failure or market exit impact on regulatory scrutiny Managing the block Market expansion planning 16

18 Raising and Using Capital Largest barrier to entry to start-up companies Funding RBC requirements Holding Company Approach Funding Start-up costs vendors, real estate, FTE 17

19 Business Planning and Surplus Sufficiency Report Submitting the application and business plan Surplus Sufficiency Report: Detailed set of assumptions around pricing strategy, market assessment, expense components and expense validation, acquisition costs, retention, etc. Adverse scenario testing and impact on PDR and RBC Financial ProForma Underlying data sources and modeling technics 3 rd party contracts: Vendors, reinsurance arrangements Regulators need to be convinced that carriers are well-funded, can meet member and 3 rd party obligations and have a long term business strategy that fits the market and regulatory climate 18

20 Employ Strict Pricing Rigor Expenses Regulatory and Health System Climate Competitive landscape and market volatility Underlying data and pricing discipline Risk adjustment 19

21 Pricing Rigor: Expenses Expenses Regulatory and Health System Climate Competitive landscape and market volatility Underlying data and pricing discipline Risk adjustment Start-up costs: How are these accounted for? Operating expenses: Internal vs. External Managing overruns Vendor Management Actual to Expected Reporting 20

22 Pricing Rigor: Regulatory and Health System Climate Expenses Do your homework Mandates Potential 11 th hour DOI guidance impacts Supplemental filings Understand competitor contracting Network structures and Health System competition DOI expectations Regulatory and Health System Climate Competitive landscape and market volatility Underlying data and pricing discipline Risk adjustment 21

23 Pricing Rigor: Competitive Landscape and Market Volatility Expenses Regulatory and Health System Climate Competitive landscape and market volatility Underlying data and pricing discipline Risk adjustment Competitive Landscape Prior carrier performance Regulatory actions related to Fed Guidance Rate increase activity and carrier ability to get approvals Understanding entering/exiting carrier impacts on the marketplace Market Volatility Determining a stable marketplace Recent carrier entrants, exits and MLRs Risk vs. Reward of entering single carrier markets Opportunity or Risk Beware the arms race to capture membership 22

24 Pricing Rigor: Underlying Data Sources and Pricing Discipline Expenses Regulatory and Health System Climate Competitive landscape and market volatility Underlying data and pricing discipline Risk adjustment Data Sources and Use Best sources for Start-up or new market entrants Truven data: Pros and Cons Other public sources URRT MLR Health Exhibits Morbidity adjustments to Truven Pricing model approach Pricing Discipline Modeling contracts Stick to pricing principles and assumptions When to walk away from a market Reasonable membership targets vs. Aggressive Growth Tie back to ProForma business plan 23

25 Pricing Rigor: Risk Adjustment Expenses Regulatory and Health System Climate Competitive landscape and market volatility Underlying data and pricing discipline Risk adjustment Estimating Risk adjustment payable/receivable Consistent monitoring of transfer position relative to pricing assumptions Working with the Pop Health team to understand outstanding gap revenue Knowing what to chase EDGE submission and getting the most out of your data 24

26 Managing the Block Monitor early utilization warning signs Rx usage and mix Professional services IP admits/1000, seasonal tracking ER rates per 1000 Leverage health information exchanges Actual to Priced for expense levels Pricing for 2 nd year without experience Reinsurance Federal Excess of Loss Quota Share 25

27 Expansion Planning Understand the capital requirements Use of existing license vs. filing for new license multiple DOI s involved Managing the growth appetite Keep risk adjustment front and center less risk beginning in

28 Closing Comments Stay disciplined Manage risk early No perfect solution to avoid solvency concerns Actively measure utilization Slow steady growth historically a preferred method (except to investors) 27

29 Have a Contingency Plan 28

30 Regulatory Evaluation of Solvency With Respect To Pricing Risk Lisa Parker, ASA, MAAA Shumei Kuo, FSA, MAAA 29

31 Polling Question My Pricing Role: a) I m not currently doing pricing b) I m supporting pricing & rate filings c) I m responsible for pricing and meeting filing deadlines d) I/my group make the pricing recommendations e) I/my group make the pricing decisions

32

33 50% 45% 40% 35% 45% My Pricing Role: 30% 27% 25% 20% 15% 10% 9% 9% 9% 5% 0% a) I'm not currently doing pricing b) I'm supporting pricing & rate filings c) I'm responsible for pricing and meeting filing deadlines d) Imy group make the pricing recommendations e) Imy group make the pricing decisions

34 Polling Question Have you ever participated in the process of your company undergoing a financial condition exam? a) No, never b) Yes, some c) Yes, a lot d) What s that? 33

35

36 60% Have you ever participated in the process of your company undergoing a financial condition exam? 55% 50% 40% 36% 30% 20% 10% 0% a) No, never b) Yes, some c) Yes, a lot d) What's that 9% 0%

37 A Risk-focused Examination is Not an audit An assessment of a company s controls, processes, procedures, and overall corporate governance designed to provide the regulators with the information needed to monitor the company s operations until the next examination Forward looking, in that a primary goal is to identify any weaknesses in controls that might increase the company s prospective risk.

38 Phases of Risk Focused Exam Phase I: Understanding the Company Phase II: Identify and Assess Risks Phase III: Identify and Evaluate Controls Phase IV: Determine Residual Risk Phase V: Conduct Detailed Exam Procedures Phase VI: Update Prioritization and Supervisory Plan Phase VII: Draft Exam Report and Management Letter 37

39 Identify Risks Credit Legal Liquidity Market Operational Pricing/Underwriting Reserving Reputation Strategic 38

40 Polling Question Where would you rank pricing risk? a) Number 1 b) In the top 5 c) In the bottom 4 d) It s a risk?

41

42 70% 60% Where would you rank pricing risk? 62% 50% 40% 38% 30% 20% 10% 0% 0% 0% a) Number 1 b) In the top 5 c) In the bottom 4 d) It's a risk

43 Risk Statements Pricing/Underwriting: pricing and underwriting practices are inadequate to provide for risks assumed Reserving: actual losses or other contractual payments reflected in reported reserves or other liabilities will be greater than estimated Strategic: inability to implement appropriate business plans, to make decisions, to allocate resources or to adapt to changes in the business environment will adversely affect competitive position and financial condition 42

44 Risk Matrix for Pricing & Underwriting The insurer has not developed and followed its overall underwriting strategy Underwriting results are not monitored and updated in order to measure success or failure of business written The insurer has not established and maintained appropriate risk exposure limits The insurer has not established sufficient pricing practices, resulting in inadequate or excessive premium rate in relation to its assumed risks and expense structure 43

45 Risk Areas to Consider Composition and amount of growth Competition Diversification New and/or discontinued products Reliance on asset returns to cover underwriting losses Utilization of reinsurance Claim costs and trend 44

46 Evaluating Pricing and Underwriting Controls Management and the board establish realistic goals/objective and evaluate results Changes in product pricing & underwriting are justified and reviewed by senior management for adherence to profitability/growth plans and objectives 45

47 Pricing Controls & Process Assumptions & methodology Doer, peer reviewer, final review by pricing actuary Pricing actuary s independent recommendations Senior management involvement & approval Documentation of the above Internal testing

48 By line of business Underwriting gains/losses Medical loss ratios Membership Trends Actual vs. expected Claims and admin expenses Major drivers of discrepancies Examiner s Analysis Company actions Actuarial related Business strategies & Company initiatives Premium to surplus ratio trend

49 Pricing Actuary Interview Internal: Experience analysis of claims and expenses, risk adjustments Provider rates, incentive, risk sharing Product & business strategies: product development & innovations, business mix, strategic directions, ERM Company initiatives: cost savings, risk score maximization External: Compliance & regulations Industry, market & competitiveness Provider mergers & acquisitions Resources: data, staffing, access to senior management Professional independence in pricing recommendations & decisions

50 Rate Reviews LTC Pricing Risks Mortality Risk o Use of appropriate mortality table and/or scalers Lapse Risk o Original pricing assumptions too high (current 0-1%) Morbidity Risk o If underestimated, then probably under priced

51 Rate Reviews ACA Pricing Risks Network Capacity o Limits on number of policyholders that can be handled Risk Adjustment o Uncertainty of risk scores Metal Level Migration o Rate increases / market position causes migration to other metal levels

52 Polling Question What I may find most challenging this season? a) Product strategy b) Population risk projection c) ACA/Risk Adjustment receivables & payables d) Claims trends e) Others

53

54 50% 45% What I may find most challenging this season? 47% 40% 35% 30% 25% 20% 20% 15% 13% 13% 10% 7% 5% 0% a) Product strategy b) Population risk projection c) ACARisk Adjustment receivables & payables d) Claims trends e) Others

55 In the News

56 55

57 Legal Entity & Solvency Single legal entity vs. multiple Medicare & Medicaid Individual, Small Group and Large Group Risks not covered by RBC Operations, regulatory, relationship to providers Other surplus measures to capture major risks not covered by RBC Group-level perspective on risk & capital (ORSA) Capital adequacy (no action over 200% RBC, Company Action, Regulatory Action, Authorized Control Level = 100%, Mandatory Control Level) The flip side: How much is too much from regulators perspective? Impact on 2019 rate approvals

58 Health RBC Formula (Simplified) H0 + Square Root (H1 2 +H2 2 +H3 2 +H4 2 ) H0: Asset risk for affiliates with RBC H1: Asset risk for other H2: Underwriting risk H3: Credit risk (reinsurance, intermediary risk, etc.) H4: Business risk (admin expenses, ASO fees, excessive growth risk, etc.)

59 Polling Question Over the next year or two, the industry RBC trend a) Will be similar to current level b) Will go up c) Will go down d) Have no idea

60

61 35% Over the next year or two, the indusrty RBC trend 33% 30% 27% 27% 25% 20% 15% 13% 10% 5% 0% a) Will be similar to current level b) Will go up c) Will go down d) Have no idea

62 Health RBC Ratios 40% 35% 30% 25% 20% 15% 10% 5% 0% Less than 200% 200% to 300% 300% to 500% 500% to 1000% Greater than 1000%

63 Sensitivity Analyses Varying major risk drivers: Health care trend rate ± 1% Population risk change ± 5% Membership change ± 10% Business mix change Unique risks Reasonable combinations Major drivers, most likely scenarios, and capital plans 3 to 5 years capital projection in ORSA reports (2018 reporting, 4 th round); uniqueness

64 Polling Question Does my company submit an ORSA report? a) My company is exempt b) My company is not exempt but we haven t submitted one c) My company has submitted report(s) d) No idea (No worries!)

65

66 35% 33% Does my company submit an ORSA reoprt? 33% 33% 30% 25% 20% 15% 10% 5% 0% 0% a) My company is exempt b) My company is not exempt but we haven't submitted one c) My company has submitted report(s) d) No idea (No worries!)

67 Own Risk and Solvency Assessment (ORSA) Risk culture & governance Risk identification & prioritization Risk appetite, tolerance & limits Risk management & control Risk reporting & communication Credit Legal Liquidity Market Operational Pricing/Underwriting Reputational Reserving Strategic Other 66

68 Goals of ORSA per NAIC To foster an effective level of enterprise risk management at all insurers through which each insurer identifies, assesses, monitors and reports on its material and relevant risks, using techniques that are appropriate to the nature, scale and complexity of the insurer s risks, in a manner that is adequate to support risk and capital decisions To provide a group-level perspective on risk and capital, as a supplement to the existing legal entity view 67

69 The Good and Not so Good US ORSA is principle-based and not prescriptive, so insurer chooses how to measure risks, how to quantify capital, the stresses, the projections Forcing more discipline around risk management o Interpretation issues o Compliance fatigue o Quantitative challenges o Robust rationale o Use versus compliance Source: 2018 ERM Symposium, Ms. E. Russo, ERM Advisor, NAIC 68

70 Challenges & Environmental Factors ACA payables and receivables Risk population migration (ACA/non-ACA) Competition Regulations Consumerism Provider financials, M&As Disruptors/innovators of health care coverage

71 Polling Question: Which subject is not included in the NAIC Health Reserves Guidance Manual? a) Claims reserves b) Contract reserves c) Provider risk sharing payable/receivable d) Premium deficiency reserves e) ACA risk adjustment payable/receivable 70

72

73 70% 60% Which subject is not included in the NAIC Health Reserves Guidance Manual? 63% 50% 40% 38% 30% 20% 10% 0% 0% 0% a) Claims reserves b) Contract reserves c) Provider risk sharing payablereceivable 0% d) Premium deficiency reserves e) ACA risk adjustment payablereceivable

74 Do I care about reserves? Prospective risk Premium Deficiency Reserves (PDR) Guidance: NAIC SSAP No. 54, ASOP No. 42, NAIC Health Reserves Guidance Manual When? When to set up When to re-evaluate and revise PDR & Solvency Underestimating PDR resulting in overstating RBC & vice versa

75 Questions? 74

76

77

78